Kemp prescription for Philippines: Reaganomics. Business revival top priority, says New York congressman

By
John Dillin, Staff writer of The Christian Science Monitor /
February 28, 1986

Washington

Political freedom today -- economic freedom tomorrow. That's the prescription US Rep. Jack Kemp (R) of New York would like to see applied to the Philippines, where economic growth has lagged far behind the rest of East Asia. Mr. Kemp, the senior Republican on the foreign appropriations subcommittee of the House, says the Philippines has been wracked by high taxes on the middle class, a falling peso, and an unfavorable environment for business.

While most of East Asia was booming, the Philippine economy fell by 6 percent in 1984 and was only flat in 1985, according to the World Bank.

Kemp, interviewed at his Capitol Hill office, said that along with its new, hard-won political freedom, the Philippines needs economic freedom. It should cut taxes, free its agriculture, stabilize its currency, and ``stop punishing entrepreneurs,'' he recommended.

If all that sounds familiar, it's because Kemp feels that the lower taxes and deregulation that characterized ``Reaganomics'' in the United States is just what is needed in the Philippines.

World Bank economists note that political troubles have been partly responsible for the poor economic performance of the Philippines. But the country's economy has also suffered from high interest rates, severe drought, a poor balance of trade, and large debts, World Bank officials say. While the Philippines economy dipped, South Korea, Japan, Hong Kong, and Singapore enjoyed explosive growth.

Many members of Congress want to help the fledgling Philippine democracy by pumping in more foreign aid. Kemp says he generally favors a ``healthy level of assistance to other nations.'' But he cautions that increased aid to the Philippines could be ``frittered away'' without changes in that nation's tax, fiscal, and monetary policies.

Kemp says there are similarities between the current Philippine economic troubles and the US experience in the late 1970s, when growth lagged here. And Philippine-style supply-side economics could be an answer.

``That means less steeply graduated income tax rates. They are very, very high on the middle class and the entrepreneur in the Phillippines,'' he says. It also means cutting government spending, stabilizing the peso, and deregulation of business.

The Philippines has been moving in the opposite direction in recent years, noted Kemp, who is considered one of the leading candidates for GOP presidential nomination in 1988.

``Generally speaking, the IMF [International Monetary Fund] has been working with the Philippines for a long time telling them to raise their taxes and to devalue their currency -- exactly the opposite thing that should be done.

``As inflation goes up, so do taxes, with working people pushed ``into higher and higher brackets. Ultimately, as our economy was doing in the 1970s, our capital [base] was going down and unemployment was going up, and all sorts of bad things were happening.''

An official at the World Bank concedes that the Philippines has been urged to boost taxes as a means of reducing its international borrowing. But inflation, along with the falling value of the peso, has been a major concern of international bankers, just as it is with Kemp.

An IMF official says Kemp's prescription for success actually ``is exactly what the IMF is telling the Philippines.'' The differences are only ``nuances,'' he says, ``much the way the fine points of economic policy are fought over in the US.''

World Bank and IMF officials note that there is strong sentiment in the Philippines that the key to growth is an increase in confidence among members of the local business community. If small and medium businesses there can be encouraged to expand, perhaps through tax breaks, international investors will be attracted.

Along with its new political freedom, one of the most encouraging developments in the Philippines in recent months has been the decline in the inflation rate. Inflation peaked at a 64 percent annual rate in September and October of 1984. It was 50.3 percent for that entire year. As the economy sagged, inflation fell to 23.1 percent in 1985, and in recent months has been running at about 4 percent.

Unfortunately, much of the drop in the inflation rate can probably be attributed to the country's economic decline.